Southwest executives have confirmed that it plans to operate AirTran's 86 Boeing 717s once its acquisition of AirTran closes and the Atlanta-hubbed carrier is folded into the Southwest brand. Southwest today unveiled plans to acquire AirTran through a combination of cash and common stock. Both carriers operate the 737-700, and Southwest is evaluating adding the larger -800 to its fleet. Southwest also operates 737-300s/500s. During a call with media to discuss the acquisition Southwest CEO Gary Kelly said the carrier has decided it wants to keep and operate the 717, and will operate the smaller aircraft in a single 117-seat configuration. Currently AirTran operates its 117-seat 717s in a dual class offering. Kelly acknowledges the addition of the 717 requires a different type crew rating and establishing how the aircraft is scheduled into operations. But he believes the 86 aircraft offer enough scale and says Southwest has the ability to incorporate the aircraft into its fleet cost effectively. "Our pilots have looked at it [the 717] and like it," Kelly states. The aircraft will also allow Southwest to operate in markets too small to support its 737 fleet. Southwest's chief says the carrier is not prepared to make a decision on adding the larger -800 to its fleet. "We hope to make a decision soon," he says. Previously Southwest indicated it would decide on adding -800s in December and has negotiated a tentative deal with its flight attendants to operate the aircraft. Commenting on the impetus to acquire AirTran Kelly states that after a tumultuous last couple of years in 2010 Southwest is finally comfortably profitable enough to strategically think about its future by examining its technology, fleet and possible acquisitions. Today he revealed Southwest also plans to replace its reservation system.

I published this analysis earlier today on GLG News, and have reproduced it here for our readers.

Southwest’s acquisition of AirTran provides several benefits, including international service, more modern information technology, and a major hub operation in Atlanta. It also brings up the question of fleet growth, and Boeing’s strategy to counteract the Airbus A320 NEO which is expected in mid-October.Prior to the acquisition of AirTran, Southwest indicated that it is examining the Boeing 737-800 for potential addition to its fleet, and that it had obtained the approval of its pilots and flight attendants for such a move. With the acquisition of Air Tran, also a major 737 operator, that becomes more likely.

Post acquisition, Southwest will operate 487 737-700s, 173 737-300s, and 25 737-500s, in addition to 86 717s. With an average age of under 10 years, Southwest’s fleet will be fairly young, but also include a significant number of aircraft that will need replacement for economic reasons over the next few years. In particular, the 737-300s and 737-500s are significantly less fuel efficient than the -700, and will be more than 20% less fuel efficient than the PW1000G powered CSeries from Bombardier when introduced in 2013.

AirTran’s fleet of 86 Boeing 717s, 55% of the 156 built, are relatively young aircraft and fit a market niche. More importantly, that fleet is leased to AirTran by Boeing, and Southwest will almost certainly utilize its leverage as Boeing’s largest narrow-body customer to re-negotiate more favorable lease rates for those aircraft, particularly give the dramatic operating cost differential it will face once the CSeries comes into service.

Southwest adding the 737-800 would confirm that Boeing plans only minor improvements that yield 3-4% operating cost improvements to the 737 while it waits for a new technology replacement. Boeing faces decisions on both the 777, which faces stiff competition from the A350XWB (and is also Boeing’s highest margin aircraft) as well as competition from the re-engined Airbus NEO, Bombardier CSeries, Embraer ESeries+, Comac C919 and Irkut MS-21 in the narrow-body regime.

In evaluating whether to attack a market with one competitor or five, I would focus on the wide body market in the near term, and wait to see if unducted fan technologies promised by GE and Rolls Royce become feasible before committing to an all new narrow-body aircraft. If the new technology works, the design can move in one directions, and if it doesn’t, the PW GTF promised continued growth in efficiency to near UDF levels over the next decade.

If Boeing were to launch a new technology narrow body into the market soon , Southwest would be unlikely to acquire the 737-800, as that would result in the aircraft becoming economically obsolete within a decade when compared with an all new technology alternative promising 20% operating cost improvements, which it would need to beat the CSeries.

Bottom Line: Southwest moving forward with the 737-800 means Boeing won’t likely have a 737 replacement until the 2020 timeframe, and that Boeing will wait for new engine technology from GE, RR and PW before making its decision.

Well, Dow Jones on Thursday quoted Southwest Airlines Chief Executive Gary Kelly saying he wants Boeing to re-engine the 737 and saying the issue might lead the all-737 airline to look at other options. Kelly also said he was "skeptical" about Boeing's talk of replacing the 737 around 2020

Southwest believes re-engining is the only viable option in the near termBy Lori Ranson

Southwest Airlines believes re-engining of existing narrowbodies is fast becoming the only option for airlines looking for a 15% cost benefit as fresh narrowbody designs will not emerge until after 2020.

"I think what is going to happen is that the decision is almost going to be made for us," Southwest executive vice president of strategy and planning Bob Jordan tells ATI. "We're 12 or more years away [from a new narrowbody design], and we cant' wait that long for a step change in aircraft costs."

Jordan says if a re-engined option emerges much sooner that creates a significant cost benefit, "what happens is you de facto end up with a decision because it is the only option in any reasonable amount of time".

He says Southwest hasn't made a firm decision on re-engining, but "personally I would be very surprised if re-engining isn't the option we pursue".

Jordan also believes manufacturers need to commit to the 12%-15% step change in efficiency a re-engined narrowbody could deliver. "Boeing is a fantastic partner, but we need both our engine manufacturer GE and Boeing to step up and take the lead."

Southwest Airlines Co. increased pressure on Boeing Co. to upgrade its top-selling 737 model with more fuel-efficient engines, as Airbus SAS did with a competing plane, because waiting a decade for an all-new jet is too long.

“When you talk about something that’s 10 years from now, that’s not a solution, that’s an idea,” Southwest Chief Executive Officer Gary Kelly said in an interview in New York. “Who among us is to say it won’t be 15 years from now? In the meantime, we’re going to spend $40 billion on fuel.”

Southwest is the biggest operator of the single-aisle 737, a competitor of the Airbus A320, which Boeing has said may not be replaced with an all-new model before 2020. While Airbus said Dec. 1 that it would offer new engines on its narrow-body plane, Boeing has delayed a decision on the 737 until 2011 after initially planning an announcement this year.

Southwest’s fleet of 544 aircraft, which Kelly plans to maintain by retiring older planes as new ones are added, consists solely of 737s. The CEO said that he’s willing to wait “to a point” for Boeing to decide on offering a new engine before he looks at alternatives.

“I don’t feel any issue today, that we have to have an answer today,” he said. “In the meantime if there are real things that are alternatives, one is forced to look at that. We are very supportive of their efforts. There is no implied criticism here. At all.”

Capacity Increase

Fuel accounted for 33 percent of Southwest’s total operating expenses in the first nine months of 2010, and a plane with about 15 percent higher fuel efficiency would help cut costs.

The Dallas-based carrier will increase capacity 3 percent to 5 percent in 2011, excluding the fleet from its acquisition of AirTran Holdings Inc., Kelly said in a speech today in New York. Southwest said it has completed plans to convert 20 existing aircraft orders to Boeing 737-800s from -700s, with initial deliveries expected in 2012.

The more fuel-efficient and larger -800 will enable Southwest to carry more people on high-demand routes and allow flights to destinations such as Hawaii, Central America and the Caribbean.

Chief Operating Officer Mike Van de Ven said in October that Southwest was “indifferent” on whether Chicago-based Boeing chose to offer an all-new successor to the 737 or a modified version with new engines. That was before Airbus unveiled its plan for the upgraded A320, which it called the A320 NEO.

‘Material Event’

“The Airbus NEO announcement is a material event and that has to be factored in,” Kelly said. “We may need to understand -- may being a key word -- in depth what that’s all about.”

Boeing has said it would prefer to focus on a new jet because customers don’t see a business case for the interim- engine step.

“We’ll do our studies, work with customers, see what their requirements are, and at such time that we’re satisfied we’re doing right by our customers and by the market, then we’ll make that decision,” Tom Brabant, a Boeing spokesman in Seattle, said today.

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The planemaker began testing small tweaks to its existing 737 last month that would make the plane 2 percent more fuel- efficient by the middle of next year.

"We want something better than we've got," Kelly said. "Pratt & Whitney has an engine that's more fuel efficient. GE has an engine that's not far behind. What's the plan? You've got an answer from Airbus, you've got an answer from Bombardier. And we need a means to reduce our fuel bill and our carbon emissions."

Southwest’s order for 737-800s doesn’t rule out smaller models like CSeries

Southwest Airlines fired a warning shot across Boeing’s bow when its #2 executive said the carrier is open to a third aircraft type, after the 737 and incoming 717. This opens prospects for Bombardier and its CSeries, but it’s not likely the Airbus A319neo has much of a chance.At an investors’ day in December, Mike Ven de Ven, the chief operating officer, told the crowd, “at some point a new airplane is going to come out, whether it’s the CSeries, or whether Boeing replaces the 737. And at some point in time, Airbus is going to replace the A320,” according to FlightGlobal.

Southwest has 175 Boeing 737 300s/500s that are aging and need replacement. Some leases expire as early as 2013-2014. Additionally, Southwest has 86 incoming Boeing 717s with the acquisition of AirTran. The 737-300s seat 137, the 737-500s seat 125 and the 717 will seat 117 in Southwest’s configuration. The 737-700 is the same size as the -300 but this is aging and doesn’t fit Southwest’s need for a fuel-efficient replacement. The 737-600 is the same size as the 737-500, but Boeing hasn’t sold one of these since 2005 and is also aging and not up to Southwest’s fuel efficientcy requirements. Boeing has no replacement for the 717.There is just one airplane that can replace the 717 and 737 Classics with the fuel savings that Southwest demands in the timeframe (by 2015-16) that Southwest wants: the Bombardier CSeries. The CSeries promises entry-into-service of its 110-seat CS100 by 2013 and its 130-seat CS300 by 2014. Given the performance of Airbus and Boeing of its A380, A400M, 787 and 747-8 new airplane programs, and of BBD’s own CRJ-1000 derivative, one naturally has to be skeptical of these dates, but for the moment, let’s assume they are met. The CSeries promises 16% lower fuel burn and 20% lower cash operating costs due to lower maintence expense on top of the fuel burn reduction than today’s airplanes. The net present value savings between 2013/14 and the 2019/20 or 2025/27 new airplane dates being talked about by Boeing and Airbus respectively is huge.The problem is that in Southwest’s configuration, the CS100 and the CS300 are slightly smaller than the 717 and 737-300; BBD needs to enlarge the airplane to 149 seats at 32 inch pitch, and it will have a nice family of aircraft in the 100-149 seat range to dominate this market segment, which represents 25% of the 100-200 seat market in the next 20 years.Furthermore, the CSeries is 21st century technology.Let’s talk about a few “ifs.” If BBD produced a 149-seat “CS500″ with an EIS of 2014, if Southwest ordered a combination of CS300s (to upgauge the 717 and 737-500) and CS500s (to upgauge the 737-300) and if Southwest accepted 26 airplanes a year from BBD (this assumes another 26 from Boeing for 737-700s/800s), then Southwest could have roughly 78 CSeries in service before the A319neo is available and 130 before the 737 replacement is available, assuming a 2019 EIS. The cost savings is huge.What of the Airbus A319neo? This competes with the 737-700 (and -300) and the CS300 and it offers–according to Airbus–a 15% fuel savings compared with the Boeing products, and by the numbers, Airbus claims it comes close to the CS300.Even if it does–and we’ve seen no numbers from Airbus to convince us this is the case and AirInsight’s analysis suggests otherwise–the A319neo isn’t slated for entry-into-service until 2017, three years after the CS100 (717 replacement), two years after the CS300 (737-300/700 replacement) and two-three years before the date Boeing suggests it might replace the 737 family with a new airplane. Furthermore, the NEO is a compromise technology, combining a new engine with “old” airframe and systems that by Airbus’ own plan says will be superseded in 2025-27 by a new airplane from the European company. We simply don’t see Southwest buying an interim airplane that will be superseded in as little as two years by Boeing or in as early eight years by Airbus.Suggestions that Southwest’s recent order for 20 737-800s means a death blow for Bombardier’s CSeries are simply ridiculous. The 737-800 and its 175-seat+ capacity is needed for the slot-controlled Washington Reagan National Airport and New York LaGuardia Airport, capacity-constrained airports like Newark and to allow Southwest to efficiently serve long-haul overwater routes to Hawaii. The 737-800 serves a different market than the CSeries. Such suggestions also display a complete lack of understanding of Southwest’s internal thinking.Will Boeing relent and re-engine the 737 by 2016, as Airbus believes will be the case? It’s possible, providing Boeing decides it cannot proceed with a new airplane by 2019-2020. If Boeing does this, then it has the likely prospect of keeping Southwest instead of seeing it defect to another manufacturer.Mike Van de Van’s warning shot across Boeing’s bow is a powerful message. It will be interesting to see what Boeing does in response.

Southwest Airlines said Tuesday it is this week commencing Required Navigation Performance procedures for approaches at 11 airports, asserting that "these new efficient flight procedures and enhanced avionics" will save the LCC $16 million annually.

It added that full implementation of RNP at all airports SWA serves would lead to more than $60 million in reduced costs annually. SWA in 2008 announced at Air Transport World's Eco-Aviation conference that it would invest $175 million to implement RNP fleet wide, and previously operated a demonstration roundtrip between Dallas Love Field and Houston Hobby using RNP (ATWOnline, March 18, 2009). It has modified more than 444 aircraft with GPS and RNP software, including transitioning 343 737NGs from EFIS to PFD/ND, and completed over 30,000 pilot training events (ATWOnline, June 25, 2010).

"RNP sets the stage for Southwest to continue doing its part to conserve fuel, improve safety, and reduce carbon emissions and greenhouse gases, while simultaneously taking advantage of the high-performance characteristics that exist in an airline's fleet," VP-Operations Coordination Center Jeff Martin said.

The airports at which SWA is inaugurating RNP are Amarillo, Birmingham, Boise, Corpus Christi, Los Angeles, Chicago Midway, Oakland, Oklahoma City, West Palm Beach, Raleigh-Durham and San Jose. The Dallas-based airline said in a statement that implementing RNP procedures marks the "culmination of a four-year project with partners Boeing, GE and Honeywell. RNP is satellite-based navigation that brings together the accuracy of GPS, the capabilities of advanced aircraft avionics and new flight procedures."

VP and COO Mike Van de Ven added, "This milestone culminates substantial efforts by our company working with the FAA to position Southwest as a leading participant in a modernized air traffic control system."

A top vice president at Boeing's biggest narrowbody customer, Southwest Airlines, says the end of the decade is "too long to wait" for an all-new airplane to replace its 737 Classics, but giving the US airframer an idea of what it wants will have to wait as the carrier turns its attention to merging with Atlanta-based AirTran Airways.

"We've got fleet of 200 airplanes out there at some point we're going to have to do something with and we can't wait until 2020," says Southwest Airlines vice president operations coordination center, Jeff Martin in regard to the carrier's aging block of 737-300s and -500s.

Martin spoke to ATI on the sidelines of the Air Transport World's Eco-Aviation conference in Washington, DC.

Boeing has said it plans to provide additional clarity at June's Paris air show on whether it plans to proceed with development of a mid-decade re-engining of the 737 or proceed with an all-new aircraft with an entry into service pegged for 2019 or 2020, though direct input from Southwest, suggests Martin, may not yet available until next 2012 at the earliest.

With its recently completed acquisition of AirTran, Southwest is turning its attention to integrating the two carriers, a departure from its historical methodical organic growth, which includes - for the first time - seeing if it can operate multiple types for the first time in its history with the introduction of the Boeing 717 along side its 737s. Martin says the AirTran acquisition has "changed our whole philosophy" now that Southwest has jumped to a multiple fleets, which "perks up everybody's ears" eliminating the sole barrier to entry for manufacturers other than Boeing to sell aircraft to the carrier.

"We're going to manage multiple fleets, but what we're really going to look at is who can bring us 25% efficiency," he says, adding that a re-engined 737 Next Generation aircraft won't deliver that benefit over Southwest's 737 Classics, despite a willingness to look at that option.

"We've squeezed the turnip, there's nothing left in the NG. It now goes back to the airframe and the engine. We'll look at re-engining, but we're waiting for someone to tell us what [Boeing is] going to do," says Martin of the incremental improvement it has sought through technology updates to its 737s, including having installed winglets on 80% its 737 fleet.

"Once we get through AirTran we've got another year's work I think then we'll come up and start looking around and determine what we're going to do," he says of selecting a new narrowbody. "Right now, it's all hands on deck for the integration, but we know we've got a subfleet of airplanes that we need to address and that's the classics and there's 200 of them."

If Boeing does move forward with an all-new narrowbody to replace the venerable 737 at the end of the decade, it aims to offer 20% improvement in fuel efficiency and 10% better cash operating costs over today's 737-700 offering.

The challenge to the airframer already believes it can deliver 15% fuel burn improvement with a new engine and a modest investment, but the cost of advancing fuel efficiency an additional 5% places the development cost skyrocketing with an all-new jet.

Technology Opens The Door

Southwest's $175 million investment to move from round dial displays on the 737-700 flight deck displays to the primary flight display/navigation display (PFD/ND) arrangement for precision navigation has also allowed the low-cost carrier to expand its search beyond Boeing for an aircraft to replace the 122-seat 737-500 and 137-seat 737-300.

"From what I had told [CEO Gary Kelly] the automation changes that we're making on the flight deck and going PFD/ND opens up any fleet type we want. Not just Boeing, but we understand all cockpits look like this now," says Martin. "We had placed ourselves on an island flying round dials without automation, so this will provide us benefit when we go into the marketplace.

"We won't have to go to someone and say "can you re-program the software to make this look like a [737-200], oh can you disconnect the auto throttles and VNAV we don't use all those things." People would have laughed at us."

Though despite this "level playing field" for the Bombardier CSeries arriving in late 2013, Airbus A320neo first delivering in October 2015 and potentially even an offering from Embraer, the strong relationship with Boeing, adds Martin, is well intact.

Adding, the need to replace its aging fleet of 737 Classics combined with Boeing's timing for a new narrowbody may be incompatible for Southwest, but that has not disqualified its sole aircraft vendor for the past four decades from the competition.

"We'll give them a shot just like everybody else, main thing is as any partner you have to communicate with them exactly what you want. Not sure we have on our side have fully defined that for them."

Exactly what Southwest wants in a new Boeing narrowbody aircraft will also be guided by the 2012 introduction of the larger 737-800 into the airline's fleet, a boost of 40 seats over its 737-700. The first 737-800 equipped for extended operations (ETOPS) is set to be delivered to the carrier in March 2012.

"We haven't told [Boeing] what size we would want yet, we haven't defined that yet," says Martin. "So, in their defense it's pretty hard when the customer says well "we think we want this many seats, we think we want that many". Well I don't blame them, how do you design to that? So it goes back to that, we'll know more after we have the -800 in service for a while."